Friday, 5 July 2013

Pound Slides Below $1.50 to 3-Month Low; Gilts Fall on U.S. Data

The pound slumped below $1.50 to the weakest level in more than three months against the dollar amid speculation the Bank of England is ready to add more stimulus that tends to weaken a currency.

Sterling posted its biggest two-day decline since September 2011 versus the greenback after the central bank under new Governor Mark Carney signaled yesterday it will keep interest ratesat a record low for longer than investors anticipated. The pound extended losses today after a U.S. report showed employers in the world’s largest economy added more jobs in June than analysts forecast, attracting investors to America’s currency. U.K. government bonds fell.

July 5 (Bloomberg) -- Kathleen Brooks, research director at Forex.com, a unit of online currency-trading company Gain Capital Holdings Inc., discusses the prospects for the Federal Reserve to taper its bond purchases and the consequences for currency markets. She talks with Anna Edwards and Mark Barton on Bloomberg Television's "Countdown." (Source: Bloomberg)

July 5 (Bloomberg) -- Andrew Wilson, head of Europe, Middle East and Africa at Goldman Sachs Asset Management, discusses the Federal Reserve's plans to reduce bond purchases, the U.S. jobs market and the Chinese economy. He speaks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

“Carney caught the market unawares,” said Jane Foley, a senior currency strategist at Rabobank International in London. “He was attempting to ensure that market expectations remain more focused on the U.K. economy than on the U.S. He wanted to draw attention to the fact that the recovery is very nascent, very fragile. That leaves the pound weaker.”

The pound fell 1.1 percent to $1.4914 at 4:43 p.m. London time after dropping to $1.4858, the lowest since March 12. It slid 2.4 percent in the past two days, the biggest two-day drop since Sept. 21-22, 2011. The U.K. currency declined 0.4 percent to 86.05 pence per euro after depreciating to 86.33 yesterday, the weakest since April 17.

‘Not Warranted’

The Bank of England in a policy statement yesterday said the recent increase in market interest rates “was not warranted by the recent developments in the domestic economy.” It said it’s studying whether to pursue more formal guidance and the analysis due for release next month will have “an important bearing” on August’s policy discussions.

The nine-member Monetary Policy Committee kept its benchmark interest rate at a record-low 0.5 percent and its asset-purchase target at 375 billion pounds.

“Monetary policy looks likely to ease further,” Goldman Sachs Group Inc. analysts Noah Weisberger and Aleksandar Timcenko in New York wrote today in a note to clients. “The BOE is to consider more explicit forward guidance at its next meeting in August,” and guidance tied to economic performance may be adopted, they said.

The pound has weakened 1.8 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar strengthened 8 percent, the best performer, and the euro gained 4.8 percent.

Payrolls Increase

U.S. payrolls rose by 195,000 workers for a second month, the Labor Department reported today in Washington. The median forecast in a Bloomberg survey was for a 165,000 gain after a previously reported 175,000 increase in May. The jobless rate stayed at 7.6 percent.

Federal Reserve Chairman Ben S. Bernanke said on June 19 that U.S. policy makers may start to trim bond purchases before the end of the year as unemployment falls.

The pound will decline below $1.46 in the next month on dollar-friendly U.S. data, said Peter Frank, global head of currency strategy at Banco Bilbao Vizcaya Argentaria SA in London.

The probability of a decline to that level in the next month is 47 percent, based on data compiled by Bloomberg.

Benchmark gilt yields rose the most in almost two weeks as the improving U.S. data reduced demand for safer assets.

The 10-year yield climbed 10 basis points, or 0.1 percentage point, to 2.48 percent, the biggest increase since June 24. The 1.75 percent gilt due in September 2022 fell 0.78, or 7.80 pounds per 1,000-pound face amount, to 94.055.

U.K. government bonds handed investors a loss of 3.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.2 percent and Treasuries declined 2.9 percent, the indexes show.